Why we bounced

End of Day Update:

On Tuesday the S&P500 bounced back from last week’s selloff. Volume was “suspiciously” light, but that was expected because the selloff also occurred on light volume. These recent moves are driven more by a lack of buying and selling, and not a surge in selling and buying. That tells us most traders lack conviction are more inclined to do nothing than rush in and out of the market. As I’ve been saying for months, confident owners are showing zero interest in selling any headlines. The same goes for those with cash who stubbornly refuse to chase record prices higher. And so the stalemate continues.

I saw a headline today that claimed we bounced today because traders felt like the prospects for tax reform were improving. Yeah, sure whatever. The thing to keep in mind is journalism majors are paid to come up with explanations for every market gyration whether it is real or not. Read the news so you understand what is going on, but don’t take it at face value.

What is the real reason we bounced? My free blog post last Thursday evening explained it before it even happened:

We could see another day or two of selling, but as long as owners remain confident, supply will dry up and prices will rebound like they have every other time this year. Without a doubt this bull market will die like all of the ones that came before it, but confident owners need a reason to change their outlook and “too high” ain’t it. We need something new and unexpected. Something that threatens corporate profits. I didn’t see anything like that in today’s news flow and is why most confident owners will brush off this dip like all the others that happened this year.

Quite simply we bounced because there was zero substance to last week’s selloff. Trump fumbling the Charlottesville situation doesn’t have an impact on corporate profits. Neither did the terrorist attacks in Spain. Last Thursday was little more than a day where nothing went right and demand evaporated. But none of the events that transpired last week have a lasting impact and is why so few owners changed their outlook. Those that believed in the market still believe in it and those that criticized it are still criticising it.

The shame about selloffs is most people manage to turn a great profit opportunity into a losing trade. Traders have been praying for a buyable dip for months. Yet the first one we get these people same people run away because they are afraid things will get worse.

The first thing to understand is all selloffs feel real. If they didn’t, no one would sell and we wouldn’t dip. There is no such thing as an easy trade and the present always feels uncertain and scary. Trades only look obvious months after the fact and with the benefit of 20/20 hindsight.

The second thing is a trend continues countless times, but it reverse only once. This market has been bouncing all year long. What were the odds that this time was the “real one”? Pretty darn low. But that doesn’t stop people from predicting the next collapse every time we slip five-points.

It takes confidence and conviction to make money in the market. We cannot be right every time, but it is important to keep your nerve when everyone else is losing theirs.

Most people are now wondering what comes next. I liked the way the market responded today and it appears like the path of least resistance remains higher. We’re not setting the world on fire with these rate of gains, but a market that refuses to do down will eventually go up.

The sharp selloffs over the last two-weeks helped clear a lot of dead weight from the market. Weak and nervous owners bailed out and sold to confident owners who were willing to buy the dip despite the bearish headlines and horrible price-action. Purging weak owners and replacing them with confident ones gives us a stronger foundation to stand on. This process is why double bottoms are such a reliable buying signals.

That said, triple bottoms are not a thing. If we stumble under Monday’s lows over the next few days, that tells us this weakness is chronic and we should expect further losses. Most likely this market is headed up to 2,500 over the next few weeks, but if we cannot hold 2,420 support, then we will tumble through 2,400 support. Trade accordingly.

Jani